Strapped for cash? Want someone to pay for your way through college? These pitches made by military recruiters seem to be working, since each of the military service academies has seen a sharp rise in applications this year — ranging from a 9% increase at West Point to a 40% jump at the U.S. Naval Academy.

While I’d like to think that the sudden interest reflects a renewed pride in patriotism and interest in national defense, it’s more likely that the draw of free tuition is an increasingly powerful lure. Students at the academies receive an all-expenses-paid undergraduate education in return for the promise of serving in the military after graduation. And reducing college education expenses is high on everyone’s mind these days, boosting enrollment in community colleges and spikes in applications for financial aid at four-year schools.

The military’s financial support is particularly attractive at a time when the costs of higher education are skyrocketing, with no end in sight. The average college endowment — the main pool for funding financial aid at private institutions — dropped 25-30% in the last year. Although tuition fees have grown more slowly this year, the savings are still a pittance. Public colleges are no longer the affordable fallback plan either, as noted in the June issue of MONEY. As options for high education seem bleak, the newest crop of students seem willing to take risk of serving in the military in the return for the promise of some financial stability.

Even if a student’s family can navigate through the expenses of an elite private or public college, after all, the prospect of economic payoff from a degree feels more at risk. Consider that the unemployment rate for new graduates, at 11%, is higher than the national average. After adding the burden of student debts to that mix, pursuing an undergraduate degree through the traditional path doesn’t feel like an ideal investment. 

In addition to avoiding accrued debt, graduates of military academies may have another advantage in entering the workforce after service. An undergraduate education at a military academy is comparable to an education at an elite civilian university; the leadership skills, discipline and technical skills honed in the military’s core curriculum make these veterans unique candidates. General Electric, for one, offers veteran officers a special management training program with the explanation, “Your service made you a leader and a disciplined, strategic thinker with a level of loyalty that is unmatched.”

Obviously the volatility of the labor market still make job placement uncertain for veterans. Another downside may be that the years of required active duty fall during the prime career-building period when civilian peers are creating their early job history.  Returning veterans may find themselves behind in making connections that are crucial to long-term success — although they may have their own network of military colleagues to draw upon.

The financial stability provided by the government is a necessary payment for the unparalleled risks faced by members of the armed forces. Serving is no joke, but neither is managing student debt for decades after graduation.

The safety of municipal bonds is often taken for granted. After all, the theory goes, if a state or city runs short on cash, it can always tax the heck out of its constituents to make up the shortfall. Corporations, on the other hand, don’t have that kind of fallback.

But California’s recent budget troubles have thrown the default possibility back into the limelight. And that might have you wondering if you should bail out before yet another theoretically safe investment proves to be not so secure after all.

If you haven’t been paying attention, California seems to keep getting closer and closer to default, and its government can’t decide how to clean up the mess. Fitch Ratings recently downgraded the state’s bonds to the worst in the country (which happens to be A-, a rating many corporations would kill for). While the spokesman for California’s Treasury department says a default “won’t happen,” could you ever imagine a Treasury spokesman saying default was “kind of a possibility”?

"I'll be bankrupt"?

Let’s start off this discussion with what should be your central question: “What do I have to lose?”

In the case of muni bonds, the answer is “Not much.” For one, single-A rated municipal bonds have a historical default rate of 0.0084%. That is, only about 1 in 12,000 defaults over a 10-year period.

But let’s say you hit that unlucky jackpot. Your state says, “To heck with our creditors. We don’t care if we won’t be able to borrow money again for years,” and refuses to pay. Then what do you have to lose? The answer still is, “Not much.” In fact, according to the Wall Street Journal, in the Great Depression, while more than 15% of muni bonds defaulted, the estimated loss rate for investors was 0.5%. When Orange County, Calif. defaulted in 1994, investors actually got all of their money back.

And here’s what you have to gain: Right now, 5-year muni bonds are yielding 2.14%, which is the same as 2.97% if your income is taxed at 28%. That’s compared to a 2.44% yield on 5-year Treasury bonds.

Let’s say you’re weighing the purchase of a 5-year muni bond in its typical, $5,000 denomination against the purchase of a risk-free Treasury bond. Are you willing to risk a 1 in 12,000 possibility that you lose $25 (0.5% of $5,000) for the 11,999 in 12,000 chances of making an extra $125 over 5 years?

For me, the answer is yes. But if the 0.0084% chance of a $25 loss from a default frightens you, buy a municipal bond mutual fund that can mitigate your risk even more, such as the Fidelity Intermediate Municipal Income fund (FLTMX). Mutual funds will have other risks attached. If interest rates rise, fund prices can fall, causing you a larger loss. But in exchange, you’ll lose little money even if one of the fund’s bonds is completely wiped out.

Now, you could argue that there are even greater opportunities in stocks and corporate bonds, since virtually risk-free assets like Treasuries and municipal bonds aren’t offering much income right now. That aside, muni bonds still look like a better bet next to those issued by the U.S.A.

Bank customers used to the perks of free checking accounts — unlimited check writing, online banking, debit card use and ATM access, to name a few — might have to recalibrate their expectations soon. That’s because overdraft fees, which banks use to subsidize the expense of free checking accounts, have been under fire by consumer advocacy groups. (A quick primer: You spend $8 on lunch at Burger King and pay with your debit card. But there’s only $5 in your checking account. The transaction is still approved, but the bank slaps you with a hefty overdraft fee for the privilege.)

There have already been some changes to the way banks must disclose overdraft fees on statements, but now there’s a bigger push to require institutions to obtain accountholders’ permission before charging them overdraft fees on debit card purchases and ATM withdrawals. President Obama’s proposed Consumer Financial Protection Agency would likely address overdraft fees in some way.

That spells trouble for banks already hurting from the financial crisis. The bulk of revenue in bank retail deposits comes from penalty fees; economic research firm Moebs Services estimates that banks will rake in a total of $38.5 billion in overdraft revenue this year. In fact, a 2008 FDIC study concludes that 74% of all service charges on deposit accounts come from overdraft and insufficient fund fees, which typically range between $35 to $40 per incident. But there’s a small amount of consumers who shoulder most of the fee load: According to a May report from consulting firm Oliver Wyman, 68% of those fees come from just 5% of banking customers (who pay, on average, $1,614 each year). Meanwhile, 74% of customers pay no overdraft fees at all.

But with banks expecting roadblacks to fee income, some experts predict that the free-checking model might be on its way out. Aaron Fine, author of the Oliver Wyman report, recently told banking industry trade publication American Banker, “The industry has to change pretty dramatically because a substantial amount of the revenue that paid for free checking is likely to go away. That business model is not sustainable.”

For now, there are still plenty of free checking options out there, and many experts expect them to remain in some format so that banks can compete for customers. But Probity Financial Services, a small company based in Austin, Texas, partnered with Missouri’s Kennet National Bank in April to offer an alternative to those consumers who are tired of paying hundreds of dollars in overdraft fees each year. For $19.95 a month, you can set up a Probity online checking account that never charges overdraft fees, transaction fees, minimum balance fees and offers free online bill pay and ATM/debit card usage.

“We’re like Netflix for your checking account — you pay a fixed monthly fee and use it all you want,” says Probity CEO Tim Smith.

For those consumers who spend more than $240 a year on overdraft fees, Probity’s checking account is a good solution. Each customer is assigned an overdraft limit (no more than $500) based on credit and banking history. If the customer makes a purchase for more than what’s in his account, Probity covers the excess. To keep the account in good standing, the customer must deposit funds into the account within 60 days, or it will be closed. “The lion’s share of accountholders do bring the account into positive balance,” says Smith. He adds that most customers use direct deposit and typically just need the protection until the next paycheck comes in.

Still, $240 a year to avoid overdraft fees? Unless you’re one of those 5% of customers who spend more than $1,500 each year on those fees, there are still plenty of cheaper options to prevent overdraft pain. (And if you are one of those 5%, can you let me know how the heck that happened?) Many banks allow you to link your checking account to your savings account to cover overdrafts. And there are plenty of ways now to keep tabs on your account balances with email and text alerts. Free checking may be teetering, but it’s not going to vanish overnight.

The Vanguard Wellington fund (VWELX) turns 80 today. No worries, this is not going to be some trip down nostalgia lane — who cares about old for old’s sake? Rather, what’s compelling about the $40-billion geezer is that it encapsulates the key factors that are the foundation of successful fund investing.

Before I run through those fine points, let me cough up a big, impressive stat: If you had invested $10,000 in Vanguard Wellington at its launch on July 1, 1929, you (or perhaps your heirs) would have more than $4.7 million saved up today — an annualized gain of 8% over the 80 years. (Precisely speaking, it was the Industrial and Power Securities Company that launched back then; the name was changed to Wellington Fund in 1935, and the Vanguard Group, of which it was a cornerstone, was formed in 1974.)

Wellington’s performance, though, isn’t a matter of great returns decades ago obscuring a poor recent record; Wellington has managed a 4.4% annualized gain over the past 10 years. Now, before you scoff that 4.4% isn’t exactly the stuff retirement dreams are made of — you’re right — it is in fact a heck of a lot better than if you had parked all your money in the Vanguard 500 index fund (-1.8% annualized over the 10-year stretch).

There’s no secret to Wellington’s success. And that’s its charm. It just plugs along, putting some very old investing principles to work:

•    Start with stocks, season with bonds. Let marinate. When I started covering mutual funds more than 20 years ago, Wellington was a balanced fund; now Morningstar has it categorized as Moderate Allocation. Whatever you want to call it, the important takeaway is that a stock-heavy portfolio with a complement of bonds works. Wellington keeps about 60%-70% in stocks and 30%-40% in bonds. Even with the risk-dampening slug of bonds, the fund’s 8% annualized gain over the 80-year stretch captured about 90% of the return of an all-stock index over the same stretch, with less risk. And in periods of great volatility, such as the past 10 years, those bonds provide a great cushion to soften the pain of stock-market losses.
•    Dividends are your friend. During the 1990s, dividends accounted for just 16% of the S&P 500’s total return; blame the Internet bubble for that. But what happened in the 90s was both unsustainable and an aberration. The long term trend is that dividends have delivered more than 40% of the S&P 500’s total return; going forward it’s likely that dividends will once again matter, a lot.  It’s not just Wellington’s bonds that provide steady income; the fund’s 4% yield is in part powered by dividend-paying stocks.
•    Don’t Chase. In the late 1960s Wellington’s management decided to “modernize” the fund’s investment approach; it let the stock portion rise form 62% in 1966 to 77% in 1971, and at the same time shifted a chunk of money from staid blue chips to smaller stocks that carried the luster of greater growth potential. It was a disaster; the fund fell way behind its peers. So much so, that the guy who greenlighted that push — none other than John Bogle — was booted. Yep, even legends have lessons to learn. By the early 1980s Wellington righted the ship and returned to its roots.
•   Cheap is Good. I know you’ve heard this one before, but Wellington sure tells it in a powerful way: The no-load fund’s annual expense ratio today is a miserly 0.35%. For a managed fund, that’s a pittance — about one full percentage point less than the average expense ratio. In an environment where the bulls expect 8% a year to be a great return, you better believe 1 percentage point is a very big deal.

None of that is meant as an ad for Wellington. A  low-cost target retirement fund is actually a better next-generation riff on balanced funds like Wellington. With a target you get a mix of stocks and bonds with the added benefit of the allocation mix shifting as you age. And, hey, if you’re into building your own multi-fund, or multi-ETF portfolio, that works too. Just keep in mind the key pieces of what has made Wellington work: Include a mix of stocks and bonds, give props to the power of dividends, avoid performance chasing and keep your costs low. That’ll work this year and most probably for the next 80 as well.

Good news or bad news? The National Association of Realtors reported Tuesday that 33% of May existing-home sales were distressed (read: foreclosures and short sales) and the median sales price is now $173,000.

If you’re employed by the glass-half-full NAR, you need to spin that as good news, and the eternal optimists did not disappoint.  The trade association pointed out that the share of sales that were distressed has declined from the 45% rate in April.

But the half-empty view is hard to ignore. The current median sales price is still 25% below its May 2006 level and down 17% from the year-ago figure. The NAR may suggest that a decline in distressed sales to merely one-third of market volume is a green shoot, but that shoot is still about six feet under.

Plenty of homeowners seem to agree. The National Foundation for Credit Counseling released a survey last week indicating that nearly one-third of current homeowners doubt they will ever be able to buy another home. Forty-nine percent of respondents agreed with the statement, “Because of the current economic climate, the American dream of home ownership is no longer a realistic strategy for building wealth.”

“It appears that whether a person was directly affected or not,” says NFCC spokeswoman Gail Cunningham, “Americans’ attitudes toward homeownership have shifted.” Declines of more than 25% in value will do that to you. (The S&P/Case-Shiller home price index is down more than 30% from May 2006.)

Indeed, the American dream of flipping a house has given way to the nightmare of foreclosures. Refinancing  is getting tougher. Mortgage rates are about 0.7 percentage points higher than in early April, and new rules are generating less-friendly appraisals that can thwart a refi.

And then there’s the humongous elephant still in the room: not enough equity to qualify for a refi.  The Obama administration is reportedly reconsidering the maximum loan-to-value ratio allowed for refinancing under its Home Affordable program. Right now if you have a Fannie or Freddie mortgage and your LTV is as much as 105% — meaning you can be as much as 5% underwater — you may be eligible for the federally-backed refinance deal. But the director of the Federal Housing Finance Agency recently said talks are in progress that could boost the maximum LTV rate for Fannie and Freddie refis under Home Affordable to as much as 125%.

The implicit message: the market has gotten away from the Feds.  When Home Affordable was announced a few months ago the stated goal was to help 4 million to 5 million homeowners refinance over the next three years. But now it appears that housing prices have fallen so far that the Obama administration won’t get anywhere near that figure unless the government lowers the bar to allow mortgages with 25% negative equity to refi. The Feds hinted as much in a mid-May Treasury release: “Fannie Mae has had over 233,000 eligible refinance applications through its refinancing program, with more than 51,000 of these having loan-to-value ratios between 80% and 105%.” And the other 182,000 applications?  I’ll take the fact that the  Feds are floating the notion of changing the program to throw lifesavers out to folks 25% underwater  as a sign that the current cutoff of 5% underwater isn’t doing the trick.

But offering Home Affordable to keep someone 25% under water doesn’t compute for me. That homeowner still has little motivation to keep paying the mortgage if values slip even more from today’s level. I hope I’m wrong, but a year or two from now it it will be interesting to see the default rate on refis with such large negative equity. Perhaps it would be faster and less expensive to let the housing bubble naturally deflate, rather than try to keep propping it up.

No one can predict exactly when Bernie Madoff will die. But the date of his death, I bet, will come far later than his lawyer says it will.

The question of Madoff’s expected lifespan is extremely relevant to next Monday’s scheduled sentencing for Madoff, who has pleaded guilty to running a Ponzi scheme that cost more than 1,300 investors a total of more than $13 billion. The 71-year-old Madoff faces a maximum sentence of 150 years, and his victims want him locked up for the rest of his life. Earlier this week, Madoff’s lawyer, Ira Lee Sorkin, asked that his client be sentenced to a mere 12 years in jail.

Given that it’s hard to think of any white-collar criminal other than Madoff who has caused so much pain to so many people, Sorkin’s suggestion of that sentence to the presiding judge in the case, Denny Chin, must seem like the height of gall. But, hey — Sorkin’s a lawyer and that’s his job: To make unbelievable requests on behalf of his client.

What I find outrageous about Sorkin’s letter to Judge Chin isn’t the sentence he asks for, but some of the reasoning he uses to back it up. Citing Social Security Administration data, Sorkin says his client has an “approximate” life expectancy of 13 years. “A prison term of 12 years — just short of an effective life sentence — will sufficiently address the goals of deterrence, protecting the public, and promoting respect for the law….” writes Sorkin.

Hmmm. Is twelve years really a near-death sentence for the scammer? I don’t think so. First, let’s look  at the Social Security life expectancy tables that Sorkin alludes to. Yes, according to the SSA, a 71-year-old male, on average, will live another 12.66 years. But that’s on average; one-half of Madoff’s cohort will live longer than that. And if, 12 years from now, an 83-year-old Madoff shuffled out of jail, he’d have a one-in-three chance of celebrating his 87th birthday. He’d have a one-in-five chance of making it to 90. Just short of an effective life sentence, my foot.

And the odds of Madoff making it to 90 may even be better than that. Let’s look at another document on the SSA’s web site — one that Sorkin somehow overlooked in the course of his legal research. This particular item is a 2007 paper by SSA researcher Hilary Waldron entitled “Trends in Mortality Differentials and Life Expectancy for Male Social Security-Covered Workers, by Socioeconomic Status.” The punch line of Waldron’s paper, as it applies here: Among the guys born around the year Madoff was (1938), the better-than-average earners who made it to their 70th birthday can expect to live until age 87. The lower-than-average earners likely have to settle for 83. Rich guys, in other words, live longer than poor ones. And guess what that means for Madoff.

Now, it may be true that the life-enhancing effects of Madoff’s wealth will wear off once he spends a few years behind bars. (Unfortunately, the SSA doesn’t provide longevity stats for wealthy crooks who are sent to prison at age 71.) And  it could be argued (in fact, Sorkin does) that  Madoff deserves some leniency for his recent apparent assistance in recovering for his victims some of the money he stole from them over the years. But don’t believe that Madoff, a dozen years from now, will be at death’s door. A healthy skepticism about the state of his future health is in order.

Do recessions ruin friendships? That’s the premise of an interesting, if rather depressing, post by Emily Bazelon on the XX Blog. Class differences can wreak havoc on relationships even in good times, she notes, in all sorts of subtle and not-so subtle ways: Inviting someone to dinner at a fancy restaurant can be tricky if you don’t know whether he or she can afford it. (You may recall the movie Friends With Money, starring Jennifer Aniston as the friend without.)

“We often sidestep relationships in which spending habits don’t match up exactly,” Bazelon writes, “to spare ourselves feelings of inadequacy or insensitivity, those awkward breaches that make intimacy feel like work.”

But recession — and its concomitant layoffs, pay freezes and general economic disquietude — can upset even these carefully-calibrated relationships. When one friend loses a job, she notes, “the sudden uneven footing isn’t easy to negotiate.” Quoting from numerous — sometimes sad, sometimes bitter — emails she got on the subject from her readers, Bazelon sketches out the “collateral damage” the recession has inflicted upon relationships.

One reader moved into her parents’ house to help them pay the mortgage after her dad’s salary was cut; her friends back where she used to live blame her for the new distance (literally) in their relationships. Another reader lamented the loss of “the accidental friendships of proximity” she’d had at her former job, which she lost in the spring.

Of course, such friends are practically the dictionary definition of “fair-weather friends.” Unfortunately, as I think Bazelon’s article makes pretty clear, virtually everyone has casual friends who fit into that category; it’s just that in good times we have the luxury of pretending that they’re something more.

Even worse, Bazelon notes. the hard times are straining even the closest of friendships: It’s hard to find things to talk about when one person’s life is a mess and the other’s is going swimmingly.

If all this has made you feel broke and lonely, I’d recommend you not read this blog post about a study finding that those with the most friends at school ended up making the most money as adults, with each “extra friend” adding an extra 2% in salary.

Has the recession put a strain on your friendships?

The sweeping financial reforms President Obama announced today would bring about one important victory for consumers — a new financial product safety commission.

As described in a Treasury Department white paper, the Consumer Financial Protection Agency (CFPA) would have jurisdiction over credit cards, mortgages and other payment products, which were previously regulated by various banking agencies. The agency’s mission would be to ensure that consumers have a clear understanding of the financial products they use, as well as to protect them from abusive or unfair practices.

As President Obama said in today’s speech, “This agency will have the power to set standards so that companies compete by offering innovative products that consumers actually want — and actually understand. Consumers will be provided information that is simple, transparent, and accurate. You’ll be able to compare products and see what’s best for you.”

Consumer advocates are hailing the proposed agency. “By setting up a single consumer financial protection agency, the administration is ensuring that the same rules will apply to similar products across all financial institutions,” says Kathleen Day, spokesperson for the Center for Responsible Lending. “Companies will not be able to shop regulators for the most favorable treatment.” States would be free, however, to make laws even stricter than federal rules.

The CFPA has already received support from two influential Congressmen — Sen. Chris Dodd (D.-Conn.) and Rep. Barney Frank (D.-Mass.), who both chair key financial committees. Still, the proposed reforms  face stiff resistance from Republicans in Congress, as well as from financial services lobbying groups. The American Bankers Association, for one, has announced its oppposition.

Still, if Obama’s proposals are enacted, they could make a big difference to your pocketbook. Here’s a quick look at how you might benefit:

Mortgages: To make consumer choices easier, all lenders would be required to offer a “plain-vanilla” mortgages with simple terms and pricing along with other financial products. Consumers would also be entitled to receive clear disclosure about their mortgage, including the risks and benefits. Prepayment penalties would be restricted or banned.

Mortgage brokers would have to ensure that the products they sell are affordable to borrowers, as well as avoid conflicts of interest. The new rules would ban “yield spread premiums” — a form of compensation from lenders that have encouraged brokers to push higher-priced loans that are less affordable for consumers. Brokers would also be paid over time based on the loan performance, rather than a lump sum at closing.

Credit. The agency would regulate forms of consumer credit that previously fell through the cracks, such as overdraft protection plans, according to the White House proposal. For example, the CFPA might prohibit charging for overdraft coverage unless the consumer has opted in to the plan.

Help for low-income families. A key mission for the new agency would be to enforce the Community Reinvestment Act and fair lending laws. This would ensure that low-income communities have access to financial services, lending and investment.

Tell us, what do think of the notion of a Consumer Financial Protection Agency?